OREANDA-NEWS. Chinese money market funds (MMFs) saw a surge of institutional investor assets in 2H15, which could lead to volatile asset flows and pose a challenge to MMF portfolio liquidity management, Fitch Ratings says in a new report. Institutional investors rushed out of the extremely volatile Chinese equity markets in search of safe havens, but they are likely to reallocate assets out of MMFs as new investment opportunities emerge.

Assets under management in Chinese MMFs were CNY4.4trn (USD657bn) at end-June 2016, down from CNY4.6trn at end-2015. The stabilisation in the pace of growth in 2016 belies the strong growth of Chinese MMFs in recent years: assets more than doubled in 2015, and at end-June 2016 were 10 times larger than three years ago.

China has become the second-largest MMF domicile after the US, representing 13% of the global market compared with just 2% at the beginning of 2013. MMFs have become the largest asset class within the Chinese mutual fund industry, representing 55% of the market.

Retail demand triggered the rapid expansion in Chinese MMFs from 2H13, and dominated until 2H15 when institutional demand ballooned following the extreme volatility in the Chinese stock market in June 2015. Institutional investors represented 63% of MMF assets at end-2015.

Money-market exchange-traded funds (ETFs) also expanded fast in 2H15. These totalled 16 at June 2016, with assets amounting to CNY317bn (USD48bn).

The new Chinese MMF regulations launched in December 2015 have taken effect. Almost all money funds have become compliant with the maturity constraints limiting the weighted average maturity (WAM) to within 120 days. Most MMF contracts have been updated with liquidity fees and redemption-gate provisions. Fitch-rated MMFs maintain high portfolio liquidity relative to peers and regulatory minimums.

Negotiable certificates of deposit (NCDs) are eligible for inclusion in MMFs under the new regulations. The growth in NCD volumes and their improved secondary-market liquidity contribute to the liquidity of MMFs' portfolios.